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More ironing out to come?

There is little question that the proposed Rio Tinto-BHP Billiton tie-up in the iron-ore-rich Pilbara region of Western Australia is the biggest development in the resources sector this year.

Should it proceed as planned, the world would effectively have two extremely dominant iron-ore forces – Companhia Vale do Rio Doce in the West, and the new super joint venture in the East, together controlling nearly 70% of global production.

On the face of it, what this could mean for consumers is painfully clear from the immediate outcry from steelmakers, as well as larger country consumers, including the world’s largest iron-ore consumer, China.

But what could it mean for smaller producers, including those in South Africa? Well, our cover story this week interrogates that question.

Most observers believe the proposed deal will be positive on two counts: firstly, it means that South African producers will be able to ride on the back of the pricing power created by the consolidation; and secondly, it creates market opportunities, owing to the fact that consumers will be desperately looking for an alternative supply source.

At first blush, it is also likely to mean that Chinese resources groups – the continued industrialisation of which hinges on steel and, therefore, access to iron-ore – will be far more aggressive in seeking access to iron-ore prospects.

There is already talk that Fortescue, of Australia, which is controlled by billionaire Andrew Forrest, is the subject of investment interest, while the Minmetals group, which is about to enter Australia on the back of a $1,39-billion investment into OZ Minerals, will, no doubt, keep on sniffing.

To be sure, this resources-ownership aspiration will extend well beyond Australia, with Deloitte Touche Tohmatsu forecasting that China may spend more than $500- billion on foreign resource investments over the next eight years.